The Work Opportunity Tax Credit (WOTC) aims to incentivize employers to hire individuals who face significant barriers to employment. The credit offers employers a tax benefit of up to $2,400 per worker, covering up to 40% of the first-year wages for employees in designated “targeted” groups. These groups include disadvantaged veterans, individuals with felony records, and recipients of certain safety net programs such as the Supplemental Nutrition Assistance Program (SNAP), Supplemental Security Income (SSI), or Temporary Assistance for Needy Families (TANF). There is no limit on the number of workers for whom a firm can claim the credit, and in some cases, such as for certain veterans and long-term welfare recipients, the credit can be even higher.
Recent research, utilizing administrative data on over 13 million individuals and more than 800,000 WOTC recipients, has revealed that the WOTC is ineffective in increasing employment for the targeted groups. The data shows no measurable impact on hiring, employment, or earnings for any of the designated groups. The precision of these estimates rules out even very small effects on hiring, such as less than two-tenths of a percentage point.
One of the primary reasons for the WOTC’s ineffectiveness is that employers cannot screen applicants for WOTC eligibility during the hiring process. Employers are often reluctant or legally prohibited from inquiring about criminal records or benefit receipt due to the risk of discrimination lawsuits. As a result, the credit does not influence who gets hired. This raises the question: if the credit has no effect on hiring, why is it so costly? Who benefits from the $2 billion annual expenditure on tax credits?
The answer lies in the fact that certain large firms, particularly in industries like fast food, retail, and temporary staffing, regularly hire a large number of low-wage workers. These firms often inadvertently employ WOTC-qualifying workers. The enactment of the WOTC credit provided these firms with an incentive to review the records of their routine hires and claim the subsidy retroactively. Consequently, nearly all WOTC benefits (97%) go to corporations for workers who would have been employed regardless of the credit. The benefits are highly concentrated, with a small number of large corporations receiving a significant portion of the credits. For example, in Wisconsin, half of all credits went to just 48 large corporations, despite these firms accounting for only a small share of total hiring in the state.
The WOTC does little to expand employment opportunities for disadvantaged workers. The average WOTC-certified worker earns about $9 an hour, and the median job lasts less than a year. There is no evidence that the credit improves job retention, raises wages, or reduces reliance on public benefits. Meanwhile, a handful of firms receive substantial tax savings worth millions of dollars.
Increasing employment for disadvantaged workers is a commendable goal of economic policy. These workers face real barriers to employment, including employer bias and limited access to networks that connect them to job opportunities. However, decades of research and new evidence indicate that the WOTC does not achieve this goal. Policymakers could be influenced by corporate lobbying efforts that use the plight of disadvantaged workers to justify tax breaks for shareholders. Alternatively, they could allow the WOTC to expire and redirect the $2 billion annual expenditure to policies that more effectively and efficiently improve job opportunities.
